I still remember his words. The first “big” client that I ever had to meet with, “face to face”, was not unlike Marlon Brando’s character in The Godfather. As a big apartment developer he was hiring us to help him figure out what and where to build. Hence, “where are the people going to live?” Good question.
And, thus began a long career of trying to answer that question, among many others. But that one question has had a nasty habit of coming back over and over again like a boomerang. This past week it came zooming back with a vengeance.
In the Seattle Metropolitan Area, there is a serious housing crisis emerging. Yes, yet another crisis. And, no, I’m not talking about the “subprime crisis”, although this one is something of a sequel or second act to the drama that began there. We’re a ways down the road from that first act now and, as with the Godfather movies, I don’t really know how many sequels we’ll eventually see.
In Part I, the “subprimers” (and others) began to lose their homes, in a somewhat orderly process, and moving…..where, do you imagine? Well, most of them, assuming they had a job way back then, moved into the rental market. Fortunately for them, there were plenty of apartments available, even some number of vacant single family houses owned by speculators that were just beginning to discover just how difficult it might be to sell their white elephants.
Over the past two years, however, several key trends have emerged. First, the number of defaults and foreclosures have only increased. Second, the economy has contracted dramatically and put many others in financial jeopardy. Third, all of this movement of people out of the owner market and into the rental market has begun to reduce the supply of rental housing. Fourth, nobody is building much in the way of new housing, including apartments. Fifth, a good portion of the “excess” single family and condominium owner units are effectively “locked up” in the constipated foreclosure process.
Here’s some of the math I’m seeing for the Seattle Metropolitan Area:
The “Good News” is that people are still moving to Seattle and Everett, mostly because there are actual jobs being created at places like Boeing and Microsoft. But, since that’s not happening so much in places like The People’s Republic of California, for instance, quite a few of their hungry people are moving here. At present, that may amount to net gains of 18,000 or more people per year.
Combined with the natural, locally generated population growth, total annual housing demand may be on the order of 14,000 or 15,000 units per year in King and Snohomish Counties.
As most already know, there are fewer and fewer households that are willing (or able) to buy a home. At present, that amounts to somewhere between 4,000 and 5,000 new owner units per year, leaving a balance of perhaps 10,000 or 11,000 or so that are seeking rental housing.
While some owner housing is being converted to rental use, that process has just about run it’s course. And, due to continuing difficulties in the world of finance, only 2,000 new units have been completed recently and only another 1,600 or so other units are expected to be added to the supply over the next year.
Current apartment vacancies are roughly 4.3% (down from 5.7% only six months ago) of roughly 350,000 total units, or approximately 15,000 units. Practically speaking, something like a third of those aren’t really available for rent at any given time due to turn over, leaving something like 10,000 actually available for long-term occupancy.
Before dealing with the “real problem”, that leaves us with a near-term supply that will just barely be able to meet the expected demand. That’s maybe 14,000 units available to house 10,000 or 11,000 households. Perfect.
But, that assessment ignores two things. First, it doesn’t begin to address the needs beyond this next year. It’s almost impossible to get a new apartment projects off the ground any faster than three or four years in this market, so let’s not hold our breath for much help there. It’s simply going to take a while to ramp up enough new housing, especially if HUD provides the only available financing.
More important, thus far we’ve sort of ignored all those ongoing foreclosures. At the moment we’ve got roughly 17,000 units in the foreclosure process and that number is growing by roughly 1,000 units per month at the moment (net of actual foreclosure sales). It remains to be seen just how efficiently this process is now “discharging” households out of their homes and back into the market, but we ought to expect that most will produce increased demand for rental housing…at what ever rate foreclosures are actually processed. Even if those currently being processed take another year or so (moratoriums notwithstanding), we’re still talking about numbers that effectively double (at minimum) the demand load over the coming year.
So, where are these people going to live? Not here? Maybe in their car? Within this coming year, we could end up with something on the order of 15,000 or so “extra” households in the system, a number that, if the present trend continues much longer, will quickly triple by the end of the second year (2012).
Now, there is a distinct possibility that, as this crisis develops, many will simply refuse to leave “their” home, no matter who happens to legally own it. It may also turn out that, in this increasingly stressful game of “musical homes”, more and more people will simply take what they need, appropriating one of those many vacant homes lying about. In quite a few places, variations of the squatting phenomenon are already popping up with increasing regularity.
I do know this: rents are going to skyrocket, which means that it will be the lowest income households who are most likely to end up without “a chair” in this game. These are people who have little in the way of financial resources to help them move somewhere else, assuming they’d even be willing to do so. As it happens, many of them will also be among the ranks of those who’s unemployment benefits have begun run out, the so-called “99ers”, a population that is growing rather rapidly at the moment.
So, if you thought the subprime crisis has been fun, it’s about to get a little more interesting.